\section{Energy Markets}\label{sec:history}
Energy products are located inside the more general category of commodities, i.e. any sort of goods that have an effective physical and tangible realization, outside the logics of the market. Trading on commodities could then happen either in a physical or speculative way, whether or not the delivery of the underlying good has its effective realization.\\
%It is thus clear why some of the major players in the market often coincide with the producers of the same goods, which are involved in both of the two trading configurations with a twofold scope: the creation of liquidity, and the furniture to clients and end-customers.\\
The nature of the commodities' market makes it singular, involving long-term planning and many factors at the support of the decision-making process. As a consequence, the main financial instruments are often tailored to this context, including:
\begin{itemize}
    \item \textit{futures} contracts: a well-established financial artifact, representing an \textit{obligation} of the subscriber to obtain an agreed quantity of a commodity at a certain delivery date, for a price reflecting the financial state of the good at the stipulation date. There exist several variants of these contracts, at this point covering any major commodity, in any market and for periods up to tens of years forward in the future.\\
    Of course, given that these contracts are mostly closed before their expiration (i.e. the physical delivery of the good), they often represent a dynamic instrument for speculation
    \item \textit{forwards} contracts: fundamentally relying on the same concept as for the futures, but instead of being traded on an Exchange, they are traded \textit{over-the-counter} (OTC). Hence, the broker acts outside a regulated market, allowing for more customizable contracts
    \item \textit{options}: they are conceptually similar to futures, but the subscriber here pays a \textit{possibility} to buy/sell a commodity at a certain date, and at a certain price (still, reflecting the present situation). Again, they are a further speculative strategy, often used for hedging purposes (i.e. to reduce the risk associated to other concurrent open trades)
\end{itemize}
Energy markets typically relies on regulated entities, called \textit{exchanges}. By definition \footnote{https://sociologydictionary.org/market-exchange}, an Exchange is an economic system inside which goods and services are produced, distributed, and exchanged by the forces of price, supply, and demand. At a worldwide level, the major exchanges for traded volumes are represented by:
\begin{itemize}
    \item \textit{EEX} (European Energy Exchange): the European reference market, located in Germany and interconnecting the markets of energy and linked products. It represents a very liquid market, born as a response to the previous well-established framework in Europe, composed of several monopolies, characterizing the member countries.\\
    The main commodities are represented by Natural Gas (NG) and Power. Inside this exchange each country has its own reference price (Figure \ref{fig:EU_energy_markets}), however the \textit{TTF} price is typically adopted as the main reference, with the other prices often expressed as a function of it (i.e., $\text{TTF} \pm \Delta$)
    \item \textit{ICE} (Intercontinental Exchange): an American system, whose main products are futures, energy commodities and OTC derivatives
    \item \textit{CME} (Chicago Market Exchange): again, a USA-based system, offering a wide variety of futures
\end{itemize}

\begin{figure}[!htbp]
    \centering
    \includegraphics[width = .6\textwidth]{imgs/EU_LNG_Markets.PNG}
    \caption{Snapshot of all the reference prices for LNG (Liquefied Natural Gas) energy market in Europe. The TTF (Netherlands) is the reference price, both for international and internal (whether the other prices are expressed in they form $\text{TTF} + \Delta$ trades}
    \label{fig:EU_energy_markets}
\end{figure}

In case of power markets, electricity prices are based on a supply-demand equilibrium. Power plants are dispatched according to the \textit{merit order}, from the lowest to the highest short-run costs, until reaching the level of the demand.\\
The last unit dispatched in the merit order is called the \textit{marginal unit}. Players in the market adopt an economic behavior:
\begin{itemize}
    \item Generators produce electricity if the compensation is higher than the production costs
    \item Generating companies build new plants if they are profitable (i.e. if price signals are high enough)
    \item Consumers buy at the lowest possible price
\end{itemize}
In other words, the market is based on a supply-demand equilibrium, whose each point corresponds to a market price (Figure \ref{fig:price_elec}). An equilibrium point is reached at each period of time.
\begin{figure}[!htbp]
    \centering
    \includegraphics[width = .6\textwidth]{imgs/price_demand_eq.png}
    \caption{Illustration of the establishment of the electricity price, based on the actual supply/demand and the productive expectation of the power plants.\\
    Power plants are dispatched according to the merit order, based on the related short-run costs}
    \label{fig:price_elec}
\end{figure}
We define then as \textit{Short-Run Marginal Cost} (SRMC) the average of the variable costs of the marginal dispatched units, over the year. When capacity is sufficient, the calendar power price should be equal to it. Price cannot be neither higher (otherwise the extra-margins from selling at higher prices could be challenged by competitors willing to settle for less), nor lower (in this case, producers would record losses if selling below it).\\
In case of capacity shortage, a scarcity rent appears during some hours, i.e. a mark-up over the SRMC compensating for the additional investments and fixed costs of a new marginal unit. Depending on the market structure, this mark-up may either be reflected implicitly in the energy market price, or as an explicit capacity price.\\
In this situation, we can have then two types of movements of the merit order:
\begin{itemize}
    \item horizontal movements, due to technical outages and/or unavailabilities and/or scarce renewable energy production
    \item vertical movement, due to commodity price fluctuations
\end{itemize}
For our study, we are especially interested in the first typology of movements, especially when quantifying how a particular weather configuration can affect fluctuations in this sense, both on the production (e.g. higher than average wind generation compensating for the demand) or on the power demand (for example, higher temperatures leading to lower power demand).